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Digital Transformation in Service Management

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SMR · Journal of Service Management Research · Issue 02/2018

B 20280

EDITORS Digital Transformation in Service Management

Martin Matzner, Marion Büttgen, Haluk Demirkan,
Martin Benkenstein Jim Spohrer, Steven Alter, Albrecht Fritzsche, Irene
C. L. Ng, Julia M. Jonas, Veronica Martinez, Kathrin
Manfred Bruhn
M. Möslein and Andy Neely
Marion Büttgen
Christiane Hipp Mixed Effects of Company-Initiated
Customer Engagement on Customer Loyalty:
Martin Matzner The Contingency Role of Service Category
Friedemann W. Involvement
Nerdinger Lena Steinhoff, Carina Witte and Andreas Eggert

How to Manage Person-Role Conflicts:

Differential Effects of Transformational
Leadership Dimensions and the Moderating Role
of Individual Cultural Orientation
Veronika L. Selzer, Jan H. Schumann, Marion
Büttgen, Zelal Ates, Marcin Komor and Julian Volz

The Impact of Psychological Ownership on Value

in Use and Relational Outcomes
Michael Kleinaltenkamp, Franziska Storck, Patrick
Gumprecht and Jingshu Li

Volume 2
C.H.BECK · Vahlen · Munich
2/2018 www.journal-smr.de
Q650201802
Digital Transformation in Service Management
By Martin Matzner, Marion Büttgen, Haluk Demirkan, Jim Spohrer, Steven Alter, Albrecht Fritzsche,
Irene C. L. Ng, Julia M. Jonas, Veronica Martinez, Kathrin M. Möslein, and Andy Neely

Martin Matzner is Professor of Digi-
tal Industrial Service Systems at
FAU Erlangen-Nürnberg, Lange Gas-
se 20, 90403, Nürnberg, Germany,
E-Mail: martin.matzner@fau.de
* Corresponding Author.
Marion Büttgen is Professor of Cor-
porate Management at University
of Hohenheim, Institute of Market-
ing & Management (570B),
Schwerzstraße 42, 70599 Stuttgart,
Germany,
E-Mail: buettgen@uni-hohenheim
.de
Haluk Demirkan is Milgard En-
dowed Professor of Service Innova-
tion & Business Analytics, Milgard
School of Business, University of
Washington – Tacoma. 1900 Com-
merce Street, Box 358420; Tacoma,
Washington 98402–3100, USA,
E-Mail: haluk@uw.edu
Jim Spohrer is Director of Cognitive
Opentech Group (COG) at IBM Re-
search – Almaden, 650 Harry Road,
San Jose, CA 95120, USA,
E-Mail: spohrer@us.ibm.com

Steven Alter is Professor Emeritus
of Information Systems at the Uni-
versity of San Francisco, 2130 Ful-
ton Street, San Francisco, CA 94117,
USA, E-Mail: alter@usfca.edu.
Albrecht Fritzsche is a senior re-
search fellow at the Institute of
Information Systems at FAU Erlan-
gen-Nürnberg, Lange Gasse 20,
90403 Nürnberg, Germany,
E-Mail: albrecht.fritzsche@fau.de
Irene C. L. Ng is Professor of Mar-
keting and Service Systems and Di-
rector of the International Institute
of Product and Service Innovation
at the University of Warwick, Cov-
entry CV4 7AL, UK,
E-Mail: irene.ng@warwick.ac.uk
Julia M. Jonas is postdoctoral
researcher at the Institute of Infor-
mation Systems at FAU Erlangen-
Nürnberg, Lange Gasse 20,
90403 Nürnberg, Germany,
E-Mail: julia.jonas@fau.de.

Veronica Martinez is Senior Kathrin M. Möslein is Professor of Andy Neely is Pro-Vice-Chancellor:

Research Associate, Cambridge
Service Alliance, Institute for Manu-
facturing, 17 Charles Babbage
Road, Cambridge, CB3 0FS, UK,
E-Mail: vm338@cam.ac.uk
Innovation & Value Creation and
Vice President at FAU Erlangen-
Nürnberg and a research professor
at HHL Leipzig Graduate School of
Management. FAU, Lange Gasse 20,
90403 Nürnberg, Germany,
E-Mail: kathrin.moeslein@fau.de
Enterprise and Business Relations
at University of Cambridge, Old
Schools, Trinity Lane, Cambridge,
CB2 1TN, UK,
E-Mail: andy.neely@admin.cam
.ac.uk

SMR · Journal of Service Management Research · Volume 2 · 02/2018 · P. 3 – 21 3

Matzner et al., Digital Transformation in Service Management
The digital transformation of single companies and
of entire service businesses is an omnipresent topic
– not only in the academic discourse but also in the
current public debate. The topic is often ap-
proached phenomenologically. We invited a group
of well-renown scholars from different academic
fields to share with us personal observations and
interpretations of the digital transformation in ser-
vice management in the form of individual com-
mentaries that go beyond. The commentaries we
received are based on different theoretical perspec-
tives. They include motivations of why digital trans-
formation makes service management research
(smr) more relevant, they depict implications for
service companies, and they outline research needs.
This article conflates the submitted commentaries,
and it is the first SMR special research paper – a
paper type that will be continued in future issues to
explore topics in a similar fashion that are likely to
have a significant influence on the development of
smr.
Introduction
Computing capabilities increased exponentially in power
and relatively decreased in cost over several decades
(Moore 1974), which led to today’s broad spectrum of IT-
based automation of work in companies, public adminis-
trations, and private households. Over the last at least six-
ty years, various job profiles, comprehensive management
fields, and entire research disciplines emerged and sus-
tained that are concerned with the practical improvement
and with the academic investigation of the interplay of IT
and how tasks are executed in organizations and/or the
interplay of IT and their human users (Hirschheim and
Klein 2012; Heinrich 2012).
Given this long-term nature of the trend towards in-
creased IT-based automation (Mertens et al. 2017) and
from the viewpoint of the editors of this journal, the atten-
tion that digitalization or a digital transformation of different
businesses (Matt et al. 2015) receive as topics in the second
part of this decade is astonishing. The SMR editors there-
fore strongly believe that the topic requires a more thor-
ough review than it finds expression in the current public
debates.
This “special” research paper, therefore, intends to offer
in-depth reflections brought together through commen-
taries of respected scholars on the subject of digital trans-
formation in service management. The authors either work in
the field of service management, service science or infor-
mation systems. The commentaries provide the authors’
perspectives on, for instance, open research questions and
4 SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
open research areas related to a better understanding of
this phenomenon.
Martin Matzner and Marion Büttgen (both are editors of
this journal) provide the first commentary which unfolds
their viewpoint on what the digital transformation of ser-
vice is and in how far the digital transformation impacts
service management. Steven Alter shares his observations
on service systems that are derived from work systems
theory. He argues why this perspective provides an im-
portant opportunity to advance the understanding of the
operational impact and the service management chal-
lenges that are associated with digital transformation. Ha-
luk Demirkan and Jim Spohrer stress the role played by digi-
tal, smart machines in digital transformation. They ob-
serve that the transitioning to service based on smart de-
vices is underway for organizations, and specific ap-
proaches are required now to customize the organiza-
tion’s strategy and culture. Albrecht Fritzsche and Irene Ng
explain how the service science approach offers a unique
perspective on digital transformation, which is according
to the authors because this approach turns its attention to-
wards “the construct which will determine future indus-
try”. Julia M. Jonas, Veronica Martinez, Kathrin M. Möslein,
and Andy Neely consider the research concept of co-crea-
tion in living labs. In the digital era, digital services be-
come subjects of living labs. Furthermore, digital transfor-
mation helps create more and better interactions between
the involved organizational entities and the living lab
platform and/or co-creators.
Viewpoints on the Transformation Process
By Martin Matzner and Marion Büttgen
Digitalization and the digital transformation are terms that
received huge consideration in the course of business, in
discussions of the general public, and in the academic
discourse (Brennen and Kreiss 2016). The attributed eco-
nomic impact of digitalization is for instance underlined
by the Digital Transformation of Industries project
launched by the World Economic Forum which investi-
gates how the digital transformation of various indus-
tries will progress (World Economic Forum 2018). Politi-
cians and governments have also started to emphasize
the importance of digitalization. In Germany, the 2018
coalition agreement of the newly formed government
lists the topic as a dedicated item (“Offensive on educa-
tion, research and digitalization”) (Koalitionsvertrag
2018, in German). In such political agendas, the topic is
handled as an abstract political goal (“get economy or
society or workforce/pupils prepared for the digital age
...”) with infrastructure questions (“broadband expan-
sion”) and educational needs discussed as required po-
litical measures.
 Matzner et al., Digital Transformation in Service Management
The general public is complaining that experts emphasized
that the topic is huge, complex and multifaceted, but apart
from abstract statements they failed in precisely formulat-
ing what digitalization is about (Brost et al. 2018). Accord-
ingly, the topic is discussed phenomenologically – both in
public debate and in the academic discourse. Certain cases
are repeatedly mentioned as examples to indicate sup-
posed, abstract game-changing effects of digitalization on
businesses including the recent case of Amazon Go.
Amazon opened a grocery store to the public that works
without a checkout-line in early 2018 (Wingfield 2018),
which has been made possible by using (digital) technolo-
gies such as computer vision and machine learning. An
obvious consequence, in this case, is that a store without
checkout lines renders cashiers redundant. Although Am-
azon claims that people do not lose their jobs but merely
change roles, in other cases job losses caused by digitaliza-
tion are conceivable. While Amazon Go certainly marks a
significant change concerning the way people buy grocer-
ies it is not as innovative as it might seem based on the ex-
cessive media coverage. There are other examples of re-
tailers, such as Metro AG, which discussed similar plans
and decided to partially remove checkout lanes in their
shops starting from the early 2000s (Retail Info System
2003).
Beyond anecdotal evidence, the following three observa-
tions could indicate a disruptive change that exceeds a
pure ongoing trend of increased IT-based automation: in-
creased management awareness, financial markets expec-
tations, and core technological developments.
Management awareness: In these days, the large corpora-
tions set up dedicated management board positions, cre-
ate and expand specific departments and initiate strategy-
development processes related to digital transformation
on a large scale. Volkswagen AG is, for example, going to
create a new executive board position for “digital and IT
topics” while Deutsche Bahn AG has already appointed a
new board member responsible for these topics (Deutsche
Bahn 2018; Freitag 2017). According to Kawohl & Schnei-
der (2017), 40 % of the companies listed in the German
DAX index have already instituted CDOs or comparable
positions whereby job content, responsibility, and accep-
tance of job holders within the organizations frequently
still need to be clarified and ensured. The future will tell
us if the mentioned measures were phenomena of misallo-
cation of resources in consequence of an unjustified hype
(Mertens et al. 2017) or not.
Financial markets expectations: According to Forbes (2017),
among the world’s 25 most valuable brands there are 10
brands classified as belonging to the area “technology”.
These 10 brands sum up to a brand volume of 649.20 bn c,
while the other 15 brands are valued at 498.80 bn c as per
this data. The quintessence is that impressive expectations
SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
on the future earnings of the technology companies exist
in the financial market (irrespective of any methodologi-
cal problems of classifying brands’ value correctly).
Core technological developments: Beyond the pure ongoing
increase in computational processing power we men-
tioned above, certain fundamental technological develop-
ments could be observed in the recent years. Outstanding
among them, all humans participate today in a global IT
network that connects all of them. The Internet of Things
will soon use the same infrastructure to network virtually
all physical items as “smart” objects to human users and
other objects (Oriwoh et al. 2013). Evans (2012) called the
resulting infrastructure an “Internet of Everything” that
links smart objects, humans, and data via connected digi-
tal processes to deliver value.
Against the background of these observations, we now
would like to attempt unfolding our viewpoint on what
digitalization is and how it impacts service management.
We shared some reflections in this journal’s first issue arti-
cle on future “Topics for Service Management Research”
(Benkenstein et al. 2017), including the fundamental ob-
servation that digitalization impacts the nature of service
management’s core subject matter – the services. We,
therefore, start with our thoughts on the digital transfor-
mation of services before we discuss these developments’
impact on service management and service management
research.
The digital transformation of services
In Benkenstein et al. (2017) we explained the digital trans-
formation of services by reusing Porter’s and Heppel-
mann’s (2014) metaphor of three waves of IT transforma-
tion: Wave 1 relates to using IT as instrument to automate
single activities; wave 2 refers to IT implementing and re-
placing increasing chains of processes and to the availabil-
ity of digital infrastructures to coordinate activities and to
cooperate; wave 3 was the digitalization of the product
and/or service itself.
The Business & Information Systems Engineering journal re-
cently published a catchword on robo-advisory (Jung et
al. 2018), a topic whose genesis provides a good illustra-
tion of the three waves.1 The service robo-advisory is a digi-
talized “wave-3” service that comprises the levels custom-
er assessment and customer portfolio management, which are
both executed by computer programs. The first level re-
fers to online forms to find out about the current financial
situation, the risk strategies, etc. of a certain customer; the
second level is the automatic setup and potentially the on-
going maintenance of the portfolio according to data re-
ceived from the assessment.
1
“Catchwords” describe emerging technologies and impor-
tant phenomena for the BISE community.
5
Matzner et al., Digital Transformation in Service Management
The catchword sees robo-advisory as a second step of dig-
italization in financial advisory. The proliferation of online
banking and brokerage platforms was a previous large
(“wave-2”-type) change. Before that “traditional adviso-
ry” was in place that already used IT as an instrument to
assist in certain activities. Robo-advisory therefore repre-
sents what we in line with Beverungen et al. (2017a, p.
784) call a digital service and which they define – in varia-
tion of Vargo’s and Lusch’s (2007) definition of service – as
the application of “digital competencies [...] for the benefit
of another entity or the entity itself”.
An important promotor for new digital services is digitally
connected objects constituting the Internet of Things. Digital-
ly connected objects become smart devices if they incorpo-
rate “technologies for sensing, actuation, coordination, com-
munication, control, etc.” (National Science Foundation
2016, p. 2). Then smart devices facilitate smart service sys-
tems (Beverungen et al. 2017a).2 In these systems, smart ob-
jects allow to monitor, optimize, or remote control smart de-
vices or smart devices can autonomously adapt to their envi-
ronment (Beverungen et al. 2017b). A smart service is deliv-
ered to or via an intelligent object that is able to sense its own
condition and its surroundings and thus allows for real-time
data collection, continuous communication and interactive
feedback (Wünderlich et al. 2015). The devices will provide
companies with data on the products’ uses which allows de-
veloping new data-based services, and smart devices will al-
so develop into platforms to deliver services from the dis-
tance (Beverungen et al. 2017b) such as a smart heating con-
trol which allows the user to optimize its operation via an
App and based on sensors. Another example is ambient as-
sisted living, where a house or a person is equipped with sen-
sors and actors monitoring the person’s activity (Wünderlich
et al. 2015). The manufacturer can deliver assistance in opti-
mization as a service but also monitor its entire installed base
from the distance and use aggregated data to gain product
insights and to create new services.
The digital transformation of service management
On the basis of reflections about what the digitalization of
services means and how an ongoing disruptive change of
the (service) economy is indicated by managerial aware-
ness, financial expectations, and core technological devel-
opments, we provide a framework for analyzing the im-
pact of digital transformation on service management.
Within this framework, we identify three important tech-
nologies that affect service management, from both a mac-
ro-perspective (i.e., the transformation of service indus-
tries and business models) and a micro-perspective (i.e.,
fulfilling service tasks and jobs).
2
Notably, Jung et al. (2018) call robo-advisory a smart service al-
though it does not include smart objects. Instead they charac-
terize smart service as a result of increased IT-based automa-
tion using algorithms and intelligent software.
6 SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
Of the leading technological developments in the recent de-
cade, artificial intelligence (AI) is probably the most power-
ful source of innovation and will strongly influence ser-
vice management in the future (Rust and Huang 2014).
Characterized by the self-learning abilities of machines,
which exhibit aspects of human intelligence, AI will affect
service management in two main ways. First, it provides
opportunities to increase the effectiveness and efficiency
of service provision and customer interaction (Larivière et
al. 2017; Marinova et al. 2017; Rust and Huang 2012), such
as by using AI applications for medical diagnoses or intel-
ligent chatbots to support customer interactions. Second,
and as a consequence, AI threatens human service jobs in
a wide range of industries, from bus drivers and call cen-
ter agents to financial analysts and even lawyers and doc-
tors (Huang and Rust 2018). Robotics represents another
multifaceted technological field that is gaining relevance
for service management (Colby et al. 2016), though so far
mainly as a device to support or replace mechanical, re-
petitive work that does not require highly skilled knowl-
edge workers. Because such service work is not very at-
tractive to most employees, and those who perform it of-
ten suffer physical or psychological ill health effects, this
option nevertheless provides considerable potential for re-
organizing work and achieving productivity gains. In ad-
dition, advanced robots are gaining enhanced senses, dex-
terity, and functionalities, enabling them to perform a bro-
ader scope of manual tasks and thereby changing the na-
ture of work across various service industries and occupa-
tions (Frey and Osborne 2017). In the growing area of el-
derly care, Čaiæ et al. (2018) e.g. show that – from a recipi-
ent’s point of view – socially assistive robots might fulfill a
larger variety of supporting functions, such as safeguard-
ing, social contact, and cognitive support. In the recent
past though, hardly any technology has gained as much
attention and notoriety as blockchain technology also re-
ferred to as distributed ledger technology (DLT). Al-
though mainly associated with cryptocurrency like bitco-
in, blockchain technology has even greater potential to
disrupt business and commerce (Zamani and Giaglis
2017), due to its core mechanics. It replaces a central serv-
er’s signature with a consensus mechanism based on
proof of work (Pilkington 2016) or similar consensus algo-
rithm, without any mediation by financial institutions that
serve as trusted parties (Zamani and Giaglis 2017). In
many cases, service provision entails decentralized trans-
actions, with multiple actors spanning service networks
(Tax et al. 2013), such as e-commerce platforms, access-
based services, logistics, or healthcare systems. Because
blockchain technology ensures that each transaction is
protected through a digital signature, sent to the public
key of the receiver from the privately held key of the send-
er, it can enhance the safety and efficiency of service trans-
actions and reduce the transaction costs for all parties in-
volved. This might cause a disintermediation effect, by
 Matzner et al., Digital Transformation in Service Management
which existing intermediaries such as banks or notary ser-
vices will be driven out of value chains (Zamani and Giag-
lis 2017). At the same time, cyber-mediation might arise,
with new intermediaries entering the market and acting
as DLT service providers (Manning et al., 2016).
On a macro-level, digital transformation affects service
management because so many service industries are fac-
ing disruptive changes to their entire business. New play-
ers – often IT companies – emerge in traditional service
markets and threaten established service providers (e.g.,
Amazon and Alibaba in retail, Uber, and Google in mobil-
ity, Airbnb in hospitality) (Perren and Kozinet 2018). With
their digital business models and vast market coverage,
they function as game changers, both in established mar-
kets and beyond traditional market boundaries. In several
cases, they have successfully built new forms of competi-
tive power, creating a hub economy with one or a few domi-
nant players. Companies rapidly develop network orches-
trating skills, with a goal of creating an ecosystem that
connects customers to a range of services, other custom-
ers, and/or other providers (Larivière et al. 2017). Iansiti
and Lakhani (2017, p. 87) refer to this development as the
“digital domino effect,” to describe a process in which
more and more markets tip and the many players that tra-
ditionally competed in separate industries get reduced to
just a few hub firms that capture growing shares of the
overall economic value created (Iansiti and Lakhani 2017).
Prominent examples of this digital domino effect emerge
from the music business (which has tipped to Apple,
Google, and Spotify), the computer and software market
(losing ground to the cloud services provided by Amazon,
Microsoft, Google, and Alibaba), home entertainment
(dominated by Amazon, Apple, Google, and Netflix), and
the e-commerce market (with Amazon and Alibaba gain-
ing considerable worldwide market share) (Iansiti and
Lakhani 2017). As these examples show, due to digital
connectivity and network effects, formerly separate ser-
vice industries increasingly conflate, with the same few
players dominating this digital hub economy. In the fu-
ture, a single app conceivably might be the digital hub of a
whole economy; e.g. in China, most people already man-
age most aspects of their lives through WeChat (Chan,
2015). This far-reaching development will affect the direct-
ly involved companies but also will have severe conse-
quences for the entire market structure, the competitive
forces within these “new markets” (including providers
on different levels of the service network), and consumers.
Digitalization also drives servitization, which refers to the
transformation process of shifting from a product-centric
to a service-centric business model (Vandermerwe and
Rada 1988). This transformation is often enhanced by
technological developments that enable companies to of-
fer additional services or substitute their products with
services, such as cloud-based “software as a service” offer-
SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
ings that replace software products. The development to-
ward an Internet of Things (IoT) also allows companies to
offer novel services, such as remote control and predictive
maintenance solutions (Beverungen et al. 2017b). Some
traditionally product-based industries already have expe-
rienced a far-reaching shift in their business models due to
digitalization (Brax and Jonsson 2009; Ng and Waken-
shaw 2017; Wünderlich et al. 2015). For example, using
IoT technology including big data, self-steering tractors,
drones, and satellite imagery, the agricultural industry has
altered its business models, toward precision agriculture
solutions. Yet companies still face the notable challenge of
deriving profitable new business models that rely on
smart service provision (Reinartz and Ulaga 2008).
On a micro- or company level, digitalization affects service
management related to performing single tasks and whole
jobs, including the necessary leadership during digital
transformations. According to Huang and Rust’s (2018)
theory of AI job replacement, service tasks require four
types of intelligence, to varying degrees: mechanical, ana-
lytical, intuitive, and empathetic. They anticipate that “AI
job replacement occurs fundamentally at the task level,
rather than the job level, and for ‘lower’ (easier for AI) in-
telligence tasks first” (Huang and Rust 2018, p. 1). This
prediction implies three key outcomes: First, tasks with in-
creasing levels of intelligence will be replaced by AI over
time, such that the more tasks can be replaced by AI, the
fewer human workers will be needed. Second, different
kinds of services will benefit to varying extents from AI;
for example, services based mainly on human interaction
will be more difficult for AI to replace. Third, AI applica-
tions in service provision might drive competitive advan-
tages, in that firms that employ a cost leadership strategy
will use more AI replacement, whereas firms with a quali-
ty leadership strategy will use more human labor and less
AI (Huang and Rust 2018). Based on estimates using a
Gaussian process classifier, Frey and Osborne (2017) come
to similar results in that jobs that are characterized by
originality, persuasion, negotiation or assisting and caring
for others exhibit a lower probability of computerization.
Human interaction also might grow more important, for
both employee-customer and supervisor-employee rela-
tionships, in which case the job replacement effect might
be mitigated by a kind of counterrevolution. Giebelhau-
sen et al. (2014) show that infusing technology into service
encounters leads to less favorable evaluations when those
interpersonal exchanges are marked by employee rapport.
Accordingly, it probably will be beneficial to replace tasks
with no need for human interaction by AI or service ro-
bots. Then the remaining employee resources can be used
to a higher degree to build rapport and empathy with cus-
tomers, augmented by AI only where appropriate and ap-
plicable. Likewise, supervisors can focus more on their ro-
les as coaches and mentors, instead of decision makers
7
Matzner et al., Digital Transformation in Service Management
and instructors – roles that can be performed more easily
by AI. As Chui et al. (2015) show, a significant percentage
of the tasks assigned to even senior managers can be auto-
mated, though leadership in the sense of leading people
probably cannot be replaced by AI.
Service Transformation Enabled by Digital:
Smart Machines
By Haluk Demirkan and Jim Spohrer
Introduction
Escalating costs, mergers and acquisitions, new regula-
tions, rapidly changing technology, increasing competi-
tion, heightened customer expectations, higher turnover,
all mean that organizations must become more responsive
to changing demands, innovative and efficient. For large
businesses failures can drag on for many years and some-
times decades before the final death knell sounds. Howev-
er, other business failures occur more suddenly, like driv-
ing off a cliff (e.g. Motorola, Lehman Bros, Firestone, RCA,
Kodak, Lucent, Yahoo and Kmart).
This turbulence in today’s business world requires organi-
zations to be able to reallocate their available resources
and/or acquire additional resources as their priorities and
demands change (Fowler et al. 2000). To compete in the
marketplace and maintain relevancy, companies need to
innovate constantly. For the past decade, many organiza-
tions have focused on traditional product innovation
methods to address the challenges of globalization and
economic transformation. Most of them are still clinging
to what we call the invention model, centered on struc-
tured, bricks-and-mortar product development processes
and platforms. Today, if a customer is buying a product,
that customer wants to “hire“ a product to do a job – a ser-
vice.
Influenced by the emerging field of service science, ser-
vice capabilities have gained attention in the past few
years, offering approaches to developing more flexible
business processes that co-create value with customers
(Prahalad and Krishnan 2008). For example, Macy’s Lucy
who assists shoppers in stores, and Lowe’s LoweBot ser-
vice customers as retail service robot. None of these
would have been possible without growing knowledge of
digital technologies (e.g. mobile, IoT, cloud, big data, cog-
nitive computing, artificial intelligence, intelligence aug-
mentation) design, execution, storage, transmission and
reuse is creating opportunities to configure IT into service
relationships that create new value by reducing costs, in-
creasing efficiency and improving outcomes.
There is no doubt that computers are increasingly capable
of doing things that humans could once do exclusively
8 SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
(Demirkan et al. 2016). Today smart machines are becom-
ing like humans by recognizing voices, processing natural
language, learning, and interacting with the physical
world through their vision, smell, touch and other senses,
mobility and motor control. In some cases, they do a much
faster and better job than humans at recognizing patterns,
performing rule-based analysis on very large amounts of
data, and solving both structured and unstructured prob-
lems.
When we look at almost all innovative solutions, we see
that they are about increasing employees’ productivity
and customers’ satisfaction with new services, reduction
in the cost of backstage and frontstage service activities
and augmenting people. We call this move to agility
through innovation as “service transformation enabled by
digital – not digital transformation”. This is primarily
about value co-creation with customers through more ser-
vices, and also value-creation with internal stakeholders
through service capabilities. In the last two decades, ser-
vice systems and networks have used digital technologies
to scale up and accelerate the realization of value from
knowledge with new service offerings.
Despite the multitudes of publications that can be found
on service-dominant logic (Vargo and Lusch 2004), ser-
vice-oriented technologies (Arsanjani 2004; Demirkan and
Goul 2006; Demirkan et al. 2009; Spohrer et al. 2007) and
service science (Bitner and Brown 2006; Chesbrough and
Spohrer 2006; Vargo and Lusch 2004), several questions
are still left open. What will be the implications of service
transformation enabled by digital for institutions and
workers?
Implications for Institution and Workers
The economy today is moving into a new era, under-
pinned by cyber-infrastructure, a new architecture of com-
puting as well as both the new business models and insti-
tutional infrastructures they enable. Those changes are
driven by the convergence of a number of historic devel-
opments:
Network Ubiquity. Global inter- and intra- connectedness
create countless opportunities for collaboration. In rough-
ly a decade, the Internet – the most visible evidence of an
increasingly networked world – has reached over a billion
people. It is linking people, businesses and institutions, as
well as trillions of devices. It is facilitating and transform-
ing transactions of all kinds – from commerce, govern-
ment services, education and health care, to entertain-
ment, conversation and public discourse.
New Business Models. The simultaneous emergence of the
networked world, technology and open standards is en-
abling entirely new business designs that were not feasi-
ble before. Companies can now be far more flexible and
 Matzner et al., Digital Transformation in Service Management

responsive to changes in the economy, buyer behavior,
supply, distribution geopolitical. That is because their
business operations can be integrated horizontally, from
the point of contact with customers through the extended
supply chain, and be resourced horizontally, from the
point of technology resources to human resources.
The Changing Nature of Innovation; Open, Rapid, Collabora-
tive. The most important innovation occurring today is in
the changing nature of innovation, itself. It happens much
faster today and it diffuses more rapidly into our every-
day lives globally; it is far more open as a way of breaking
out of ‘silos’ and breaking through boundaries and collab-
orative for sensing, seizing and managing new levels of
socio-economic transformation, based on opportunity
sharing within and between multidisciplinary, multisec-
tor, multicultural researchers, practitioners and policy-
makers (Swink 2006).
The changing nature of workers. Today, more people are
changing companies; more people are working as inde-
pendent contractors; more graduates are becoming entre-
preneurs; more people are changing organizational roles.
The changing nature of workers will inevitably require
corresponding workforces, who are “cathedral builders”,
rather than “the equivalent of bricklayers” (Irving 1998);
who are not only “comprehensive problem solvers”, but
“problem definers” (Grasso and Brown 2010), who have a
basic knowledge of adjacent and connecting fields so as to
readily adapt to address the novel, complex problems that
they will encounter, co-developing and communicating
with, and co-leading multidisciplinary teams and foster-
ing innovation. The new millennium ushers in a new age
of global relations, science, technology and practice which
is not sufficiently addressed by the conventional educa-
tion. New era needs new types of professionals.
Social Systems. Social media is one of the most exciting ex-
amples of how consumerization and social presence are
enabled with digital solutions. Through the social net-
working platforms, almost everyone can easily post con-
tent and almost everyone can read it. These solutions are
conduits for interactions among employers, employees,
customers, and essentially any other stakeholders. With
social media, the locus of control is shifted to end custom-
er significantly.
Services. Service economy and thinking are growing expo-
nentially. Spohrer et al. (2007) defines a service as the ap-
plication of competence and knowledge to create value
between providers and receivers. Service systems are
complex business and societal systems that create benefits
for customers, providers, and other stakeholders, and in-
clude all human-made systems that enable and grant di-
verse entities access to resources and capabilities such as
transportation, water, food, energy, communications,
buildings, retail, finance, health, education and gover-
nance with unique characteristics (Tab. 1).
Service Orientation. “Service-oriented” means the indepen-
dent elements are described, discovered, and negotiated
for in terms of the “services” they provide. A fundamental
premise is that organizations can co-create their offerings
with customers, break siloed business processes into mod-
ular independent services that can be reused on-the-fly in
loosely-coupled dynamic business service choreographies
and they can source those choreographies by using virtual
computing resources, or “out-tasked” to internal and ex-
ternal service providers (Demirkan et al. 2009).
Service Transformation. Service thinking has transformed
traditional products and services by adopting manufac-
turing concepts such as division of labor and knowledge,
standardization, and coordination of production and de-
livery to enable new forms of value creation and con-
sumption. Manufacturing firms like GE, IBM, Xerox, and
Rolls Royce have seen an increasing percentage of their
revenue come from service offerings, rather than simply
the sale of products (Demirkan and Spohrer 2016). Apple
is another good example of a manufacturing company
that has successfully transitioned to services (Harmon et
al. 2011).

Customer contact The higher the customer contact, the higher the instantaneous demand for a service, and this will
increase the immediate impacts on customers.
Simultaneity Production and consumption, as we known from microeconomics, cannot be completely separated
from each other. Thus the consumer becomes a co-creator of a service.
Demand fluctuation The variability of demand necessitates a higher degree of capacity management because the service
over time offerings need to be produced concurrent with their consumption.
Customization Services are customized based on consumer needs and the competitive environment in which
providers offer services and consumer purchase them.
Complexity Simultaneity of production and consumption of services occur in highly complex service systems
due to interaction of people, processes, technology and shared information.
Experience Understanding and embracing the changing customer, and helping the customers achieve success
that they were otherwise unable to deliver on their own.
Tab. 1: Foundational characteristics of services

SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018 9

Matzner et al., Digital Transformation in Service Management

Service Transformation Enabled by Digital: Smart Machines.
Now, we are at an urge of another transformation. Some
people call this “digital transformation.” We call it “ser-
vice transformation that is being enabled by digital and
mostly smart machines.” According to many studies, digi-
tal transformation is revolution of business and organiza-
tional activities, processes and models to leverage the uti-
lization of a mix of digital technologies (Demirkan et al.
2016). When we review some of the most successful digi-
tal transformations (Tab. 3), we see that “service” is on the
core of all.
This revolution provides the means to improve the effi-
ciency, effectiveness, sustainability, and innovativeness of
product and service offerings through the design and pro-
visioning of new types of service offerings, the design and
delivery of outcome-targeted customer experiences, re-
ductions in the cost of backstage and front-stage service
activities, the integration of customers into service crea-
tion and delivery and improvement in customer-per-
ceived service quality (Tab. 2).
The overall goal of any transformation, including service
transformation, is to increase the productivity and creativ-
ity (decision making, connectivity, innovation, and aug-
mentation) of individuals and organizations. Transforma-
tion will let organizations address market needs much
more quickly than used to be possible, enabling higher
levels of collaboration for sharing information much fast-
er. Smart machines – cognitive computing – is transdisci-
plinary in nature and focuses on computing methodolo-
gies and systems that can implement autonomous compu-
tational intelligence to various applications such as expert
systems, robotics, autonomous vehicles, medical diagnos-
tics, machine vision, translation, employee performance
evaluations, planning and scheduling, marketing analyt-
ics, remote maintenance monitoring, and others too nu-
merous to mention here (Spohrer and Banavar 2015).

Cognitive assistants like IBM Watson, Apple Siri, Microsoft Cortana, Amazon Alexa,
Google Now and Facebook M are becoming part of our daily lives by performing tasks
for us
American Express is a financial institution with lots of smart data usage. American
Express built a machine-learning mobile phone application to provide customized
recommendations for restaurant choices
Putting IBM Watson To The Test For Cancer Care. By being a complement to an
oncologist, not a replacement, IBM Watson is accelerating patient DNA analysis and
helping to personalize treatment options for cancer patients
Lucy automates labor-intensive tasks and converts data assets into a quickly-searchable
source of insights—freeing marketers to focus on complex, higher-level functions. Lucy
is a cognitive problem solver
Gluru organize online documents, calendars, emails and other data and have AI pre-sent
you with new insights and actionable information
x.ai coordinate schedules as a personal scheduler by using AI
CrystalKnows help you know the best way to communicate with others
RecordedFuture leverages natural language processing at massive scale in real time to
collect and understand more than 700,000 web sources
LegalRobot automates legal document review in ways that can serve people and
businesses
Spotify suggests weekly new music based on the user’s preferences and behavior
Lowe’s LoweBot is able to able to answer simple questions to customers, freeing up
time for employees to focus on more important projects
IBM’s cognitive call centers improve customer satisfaction and agent retention
Cafe X opens in San Francisco, bringing robots to the coffee shop
Amazon Go becomes the first checkout free grocery store
Robot suits started to help individuals to achieve a perfect golf swing
Microsoft demonstrates an app that helps the blind see
Smart prosthetic arm and hand with sense of touch
Wearable robotic glove restores independence for stroke victims
Google’s driverless cars and trucks Tab. 2: Sample list of service
transformation enabled by
many more… digital

10 SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018

 Matzner et al., Digital Transformation in Service Management
Companies that achieve the right balance between hu-
mans and machines may become more creative, as well as
more efficient, while those that replace too many process-
es, existing technologies, and people with cognitive com-
puting will risk their unique cultures, their customer rela-
tionships, and their business models.
Conclusions
Today, business and societal organizations continually try
to innovate and work on projects to improve efficiency,
quality and speed of their operations, through new service
offerings and networks that adapt their resource base to
changing needs. In other words, they attempt to manipu-
late what are perceived of as the controllable variables
within their service systems with digital technologies (De-
mirkan and Spohrer 2014). In many cases, each of these
experiments with strategies to catalyze their local innova-
tion economies, they are often working in isolation from
one another. They often discover that these manipulations
do not achieve desired outcomes and/or create unwanted
side-effects – mainly because their service environment is
much more complex than they anticipated. Changes to the
scale of service delivery may impact service quality in un-
anticipated ways, the introduction of a new service may
create demand for different or even more services and ser-
vice innovations may unintentionally shift the market
from a product to a service quality focus rather than out-
come. Unanticipated consequences result in unnecessary
costs, lack of responsiveness and missed opportunities for
social innovation and value. Reduced fragmentation and
complexity, improved efficiency and higher levels of agili-
ty in service systems can only be achieved when multiple,
complex trade-offs are carefully balanced (Tab. 3). So, we
think that maybe it’s time to rethink services transforma-
tion – from new organizational and technical vantage
points.
Systematize Customize
Cost Effectiveness
Consistency Variance
Standardized Differentiated
Independent Interdependent
Available Convenient
Speed Accuracy
Secure Open
Stable Dynamic
Progression Scaling
Tab. 3: Examples of Tradeoff Challenges
SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
A system view of service management and
digital transformation
By Steven Alter
The intersection between service management and
digital transformation
Abstract discussions of digital transformation as an um-
brella term for digitization and automation typically clari-
fy little unless underlying ideas are defined. A similar is-
sue applies to service management because different ob-
servers have quite different ideas about the meaning of
service and service management.
This brief commentary applies work system theory as the
core of actionable ideas about service management and
digital transformation. It presents ideas from series of pa-
pers related to service and service systems (Alter 2008;
2012; 2017a; 2017b). Overall, it tries to go beyond hype
about digital transformation by summarizing practical
ideas that can be used in service management in a world
that relies increasingly on digitization and automation.
Basic definitions
Describing the intersection between service management
and digital transformation requires a series of definitions,
including three among a larger set of portrayals of service
(Alter 2012; 2017a) that are useful in different manage-
ment settings (Tab. 4).
Service systems
Other than service improvisations consistent with the first
portrayal of service, services are performed by service sys-
tems. Concepts for summarizing and analyzing service
systems are provided by a subset of general system theory
called work system theory (WST) plus extensions of WST.
(Alter 2013; 2017a; 2017b). WST consists of three compo-
nents, #1, the definition of work system, #2, the work sys-
tem framework (WSF – nine elements of a basic under-
standing of a work system) and #3, the work system life
cycle model (WSLC – model of how work systems evolve
through iterations involving planned and unplanned
change). Graphical representations of the WSF and WSLC
are not included here due to space limitations.
Definition of work system (or service system). Every ser-
vice system is a work system, i.e., a system in which hu-
man participants and/or machines perform work (pro-
cesses and activities) using information, technology, and
other resources to produce specific product/services for
specific internal and/or external customers.
Work system framework. A basic understanding of a
work system (a service system) requires attention to the
WSF’s nine elements: #1, customers of the service system
11
Matzner et al., Digital Transformation in Service Management

Digitization A societal trend and/or a localized change involving increasing application of computerized devices
that capture, transmit, store, retrieve, manipulate, or display information.
Automation A societal trend and/or a localized change involving increasing application of computers and other
machines in performing work, sometimes with people using machines and sometimes with machines
performing complete activities or functions. Automation may involve people using machines in new
ways and may involve machines performing work activities that never were done before, sometimes
because those work activities could not be done by people. Automation may or may not prove
beneficial for people whose work is affected.
Digital In business and society and within enterprises, increasing application of digitization and/or automation
Transformation that has important impacts on structure or characteristics of individual work, internal processes,
communication, infrastructures, business ecosystems, and product/services for internal and/or external
customers.
Definitions Service as acts for the benefit of others. Service is activities or groups of activities performed to
and Portrayals produce or facilitate benefits for others. (Alter 2017a). This portrayal can be applied when trying to
of Service create or improve almost any system in an organization because almost any systematic activity in an
organization can be viewed as a service for internal and/or external customers.
Service as outcomes. A service is an outcome provided for internal and/or external customers. This
portrayal supports the use of service catalogs produced by IT groups and by other organizations that
need to rationalize and communicate the range of services (such as funds transfer or Internet) that they
provide for their customers.
Service as exchange or value co-creation. Service is an exchange of value, and hence is co-created.
This is the basic idea of service dominant logic (Vargo and Lusch 2004; 2008; 2016).
Tab. 4: Definitions of digitization, automation, digital transformation, and service

(who receive and benefit from the service system’s prod- A service system view of how digital transformation
uct/services; #2, the product/services that are produced; challenges service management
#3, processes and activities within the service system; #4,
Service management (SM) is fundamentally about design-
participants who perform activities within the system
ing, improving, and operating service systems. A service
(who may include customers); #5, information used or
system lens helps in visualizing operational impacts and
produced by the system; #6, technologies used by the sys-
SM challenges related to increasing digitization and auto-
tem; #7, surrounding environment (including culture,
mation within firms, between firms and their customers,
practices, organizational politics, competitive issues, etc.);
and within product/service offerings. This section uses el-
#8, infrastructure shared with other service systems, and
ements of the WSF and WSLC to identify SM challenges
#9, strategies. The term product/service is used because
that are exacerbated by digital transformation. Comments
distinguishing strictly between products and services is
organized around the nine elements of the WSF focus
much less useful in practice than continuous design di-
mostly on service systems in operation. Comments orga-
mensions based on characteristics often associated with
nized around the four elements of the WSLC focus mostly
products versus services. Examples of those dimensions
on planning and implementation. Overall, using the WSF
include tangible versus intangible, commodity versus cus-
and WSLC as lenses affords more actionable SM insights
tomized, produced vs. co-produced, durable versus per-
than abstract discussions of the nature of digital transfor-
ishable, transactional versus relational, value transferred
mation.
versus value co-created, and so on.
Customers. Digital transformation applies equally to the
Work system life cycle model. A basic understanding of
operation of service systems and to their internal and ex-
how a work system (a service system) evolves over time
ternal customers. Product/services increasingly need to
calls for attention to iterations involving four phases: #1,
fit the value creating practices of internal and external cus-
operation and maintenance of an existing version of the
tomers. The primary SM challenge here is the lack of visi-
system; #2, initiation of a defined project; #3, development
bility concerning customer practices, especially for exter-
of resources needed for implementation in the organiza-
nal customers.
tion (including acquiring or updating software); #4, im-
plementation of the new version of the system in the orga- Product/services. Customer-facing innovation constitutes
nization. Planned change is represented by the cycle from an SM challenge both in product/services and in commu-
initiation to development, implementation, and operation nication and collaboration with customers (a type of ser-
of a new version. Unplanned change such as adaptations, vice). Both areas call for fitting the form, content, and de-
workarounds, and experimentation occurs primarily dur- livery of product/services with whatever is most useful
ing operation and maintenance. and convenient for customers.

12 SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018

 Matzner et al., Digital Transformation in Service Management
Processes and activities. The long history of IS develop-
ment is replete with software that fits poorly with current
or proposed processes and activities. The SM challenge
starts with making sure that service processes and activi-
ties take full advantage of available digitization and auto-
mation capabilities that may be ignored, purposely by-
passed, or otherwise not integrated into business process-
es. The challenge is especially difficult for semi-structured
or unstructured processes or activities whose substantial
interpretive flexibility provides little oversight about
whether old work patterns persist without attaining bene-
fits from IT-enabled innovations.
Participants. Many managers and service system partici-
pants are fully aware of the lack of skills and attitudes need-
ed to take full advantage of computerized capabilities. Both
managers and participants may be frightened about person-
al obsolescence and about being bypassed by a new genera-
tion of digital natives who can use computers to do the
same work more efficiently and effectively. The training and
involvement challenges start with basic digital literacy and
ability to use computerized tools appropriately. Deeper is-
sues concern understanding why IT-enabled service sys-
tems were designed to operate in certain ways and recog-
nizing conditions under which workarounds may be benefi-
cial and necessary or may be detrimental (Alter 2014).
Information. Capabilities related to accessing, using, and
protecting information become more important and more
complex with increasing degrees of digitization. The SM
challenge of protecting digitized information in service
systems is obvious from widely publicized examples of
information theft including email records. Access and use
of digitized information is less challenging in highly struc-
tured service systems where information usage is gov-
erned by formal scripts or activity patterns. The benefits
from information availability are realized less often in less
structured service systems whose participants require in-
formation literacy and insight.
Technologies. An obvious SM challenge involves what to
do when technologies go down or operate incorrectly due
to bugs, design flaws, or sabotage. Another challenge in-
volves assuring whole hearted use of technologies that
seem far less friendly and powerful than technologies in
users’ pockets or in their home computers.
Environment. Service systems that fit poorly with sur-
rounding organizational culture, practices, demographics,
and technological trends may still operate, but usually are
less successful than comparable service systems that fit
with their environment. Thus, identifying and reconciling
misfits related to digitization and/or automation proves
to be an important SM challenge.
Infrastructure. Even a highly localized infrastructure fail-
ure can have major consequences, such as widely reported
SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
IT problems that disrupted operations at United and Delta
Airlines in 2017. A key SM challenge is the lack of control
because essential enterprise and ecosystem infrastructure
is typically owned by other organizations and shared with
other service systems.
Strategies. A service system lens is useful in the area of
service strategy because it encourages going beyond
bland generalizations. For example, a service strategy
may rely on using big data to optimize customer experi-
ences. That will work only if use of big data is integrated
into service systems that are staffed adequately and are
supported with appropriate technologies.
WSLC – Operation and maintenance. The nine WSF ele-
ments mentioned above provide a lens for understanding
service system operation. The WSLC includes the possibil-
ity of unplanned change through adaptations and worka-
rounds, many of which are directly related to digital as-
sets and/or activities that use digital assets. The SM chal-
lenge is to make sure that adaptations and workarounds
are not detrimental, either internally or to customers.
WSLC – Initiation. Visualizing realistic possibilities for
digitalization and automation initiatives can prove chal-
lenging because it is often difficult to imagine fundamen-
tal changes in service systems while also taking into ac-
count the above issues concerning each WSF element.
WSLC – Development. An SM challenge here is to assure
that the technology developed or acquired fits with opera-
tional plans and goals for the service system being sup-
ported. This may require direct involvement of service
system participants in the development effort, from initial
specifications to testing.
WSLC – Implementation. An SM challenge here is to
make sure that the implementation effort identifies and
addresses both problems and opportunities that may not
have been anticipated. Another challenge is to assure that
the previous version of the service system continues to op-
erate effectively while the next version is being imple-
mented.
Implications for service management
As with business process engineering and big data, digital
transformation is a term that tries to crystallize important
ideas but is fundamentally vague and open to different in-
terpretations. The range of interpretations (about society?
about new types of commerce or competition? about tech-
nology? about digital literacy?) blurs its relationship with
service management.
This commentary indicated how a work system/service
system lens can help in visualizing the operational mean-
ing of digital transformation and identifying related SM
challenges. A longer commentary would present the is-
13
Matzner et al., Digital Transformation in Service Management
sues in much more depth. Both within and across enter-
prises, digital transformation occurs through the imple-
mentation of new or improved service systems. Ideas in
the WSF and WSLC help in visualizing those transforma-
tions regardless of which portrayal of service is used.
Ideas in this commentary imply several research possibili-
ties. One approach superimposes a service system lens on
top of the digital transformation literature to see which
system-related topics have been considered and which
have been underplayed or ignored. Another approach
uses the underlying ideas to develop research instruments
for describing service management as a service system in
its own right and assessing service management in the
presence of digital transformation. Yet another approach
applies this lens in action research case studies that ob-
serve how digital transformation strategies or aspirations
unfold in practice. The main point is that a service system
lens bypasses hype by focusing on operational and action-
able SM topics and challenges related to describing and
managing digital transformations.
The language of the revolution
By Albrecht Fritzsche and Irene C. L. Ng
While conceptual and empirical papers contribute to the
advancement of scientific research in a given field of
study, commentaries give us an opportunity to reflect on
its general meaning and express programmatic ideas
about its further development. This is particularly impor-
tant when it comes to a highly dynamic field such as ser-
vice research. We therefore use the following pages to dis-
cuss service research from a wider perspective and ex-
plore its role in the digital transformation of economy and
society. In particular, we examine the contribution of ser-
vice-dominant logic to the formation of a new grammar
and vocabulary for innovation, which is desperately need-
ed to facilitate radically new solutions designs and appli-
cation schemes. As an illustration, we use recent advance-
ments in the creation of digital data boxes.
Learning to speak “digital”
In the course of the ongoing digital transformation, new
design principles and constructs like cyber-physical sys-
tems (Lee 2008) or the internet of things (Atzori et al. 2010)
have received increasing attention. They mark a general
change of perspective in the treatment of information sys-
tems and enable a new type of digital innovation, in
which the design of systems architectures takes a much
more prominent role (Fichman et al. 2014). So far, digital
data processing was considered as a mechanism to sup-
port human action and decision making. Cyber-physical
systems and the internet of things go one step further by
defining a formal-symbolic environment in which action
14 SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
and decision making takes place, and where innovation
can be driven by resource integration and operational
alignment (Brettel et al. 2014; Lee et al. 2014; Lusch and
Nambisan 2015) and the overall generation of new busi-
ness models (Porter and Heppelmann 2014). The actual
development of new physical artefacts plays a secondary
role in this context. Yoo et al. (2010; 2012) accordingly de-
scribe the digital transformation as a change of mediation
which goes way beyond the introduction of new devices
to support human action. Quite in the contrary, it rede-
fines the structure of socio-technical systems: the bound-
aries of existing subsystems disappear, material instantia-
tions of objects and processes lose importance, and new
streams of value creation become possible which are ex-
pected to revolutionize industry (Kagermann et al. 2013;
Rajkumar et al. 2010).
Revolutions require a common language for the revolu-
tionaries to express their goals and align their activities. In
the context of information technology, different languages
can be found in the respective programming codes and
standards for modelling objects and their interaction.
Concepts like cyber-physical systems and the internet of
things can also be considered as means of articulation of
design possibilities on a higher level. This, however, is not
enough to grasp the programmatic content of the digital
transformation that turns it into a new industrial revolu-
tion, because it cannot give an appropriately abstract and
conceptual account of how they scaffold into the knowl-
edge of information systems in business and society. The
digital transformation is characterized by what Kuhn
(1962) and Feyerabend (1962) call incommensurability: It
goes along with a new understanding of industry, which
cannot be expressed using existing grammars and vocab-
ularies. The digital transformation requires a new lan-
guage, because it forces us to attribute meaning to indus-
trial operation in radically different ways. Its new “digital
language” should allow us to capture future technical de-
signs together with the sociocultural and economic struc-
tures in which they unfold effects in their entire disruptive
enormity. Service ecosystems research within service-
dominant logic is in the comfortable position of having
such a language at its disposal. It therefore can play a key
role in the upcoming revolution and provide the neces-
sary orientation for all the protagonists of this process to
join forces in the development of new ideas and solutions.
Based on the seminal works by Vargo and Lusch (2004;
2008), Service-dominant logic (S-D logic) has turned to a
broader definition of service as a general synonym for the
application of a competency. It has evolved a wider under-
standing of value, phenomenologically created in experi-
ence or use, depending on the given context where co-cre-
ation happens. Service-dominant logic makes it possible
to address any contributing entity to value creation as a
competency that becomes a resource in context, no matter
 Matzner et al., Digital Transformation in Service Management
if it is an artificially constructed device, a human actor or a
part of nature. The notion of service ecosystems allows the
discussion of the dynamics between the contributors to
value creation and the distinction of different substruc-
tures, institutions which control and regulate their interac-
tion, and markets as mechanisms of exchange. Vargo and
Lusch (2016) advanced the argument for a systems ap-
proach by considering system entities as ‘actors’ and be-
cause actors become stakeholders in the system’s viability
and progress, they therefore reinforce the structures with-
in the system to drive further co-creation and service ex-
changes, creating network effects. The connectivity be-
tween actors in the service system goes beyond formal
connectivity but also includes social norms, beliefs and
other “human devised rules” (Vargo and Lusch 2016). It is
such institutional arrangements, and often rearrange-
ments, that make a service system resilient, adaptive and
self-adjusting, therefore evolving the conceptualization of
service system to service ecosystem.
Orientation for engineering
What makes the language of service ecosystems in S-D log-
ic so important in the context of the digital transformation
is its focus on value creation and the conditions under
which it proceeds. Value-in-context is differentiated from
value-in-exchange (Vargo and Lusch 2004; 2008) as being
the super set of mutual value creation, and systemic archi-
tectures are considered as key to the viability of a system as
a whole, as well as its management and control (Maglio et
al. 2009; Spohrer et al. 2007). Similar to the classic Marxist
theory on use value, exchange value and the role of ma-
chinery (Marx 1887), this perspective turns the attention to
the further implications of value creation beyond industry
boundaries. Service ecosystems work is therefore able to in-
form the design and operations of systems whose bound-
aries may not be function, firm, or even industry based;
and the broadening of the perspective (see Vargo and
Lusch 2016) can inform directions in which future develop-
ments should proceed and assess the progress, especially
when bringing in the amorphous nature of data and digital
(see also Ng and Wakenshaw 2017; Smith et al. 2014).
Where other fields of research in business or engineering
evoke the images of physical objects and existing organi-
zation structure in their vocabulary, service ecosystems
work avoids references to entities which could change or
disappear. Instead, it turns the attention towards the con-
structs that might determine future industry: Smart
things, artificial intelligence entities and other organised
and organising bundles that would allow decision makers
to arrange competencies (and in turn, resources) and oper-
ations for the benefit of more and better business activity.
As Normann (2001) pointed out, digital transformation
goes along with a liquification, a separation of informa-
tion from physical carriers, such that it can be easily
SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
moved about and re-manifested in many different ways
(Michel et al. 2008). Existing constraints on the bundling
of resources that enable specific operations consequently
lose importance. Digital transformation makes it possible
to mobilize resources very specifically for certain pur-
poses and to focus exclusively on only the operations
which necessarily have to be performed and nothing else,
thus increasing the density of the resource bundles to a
maximum in terms of cost-value structures (Michel et al.
2008). The language of service ecosystems in S-D logic
supports this process perfectly because there are no prede-
fined notions of existing bundles of resources inscribed in
its vocabulary. It does not need to include any reference to
specific devices, roles and institutions of current industry.
As an ‘actor’ in a system, it is a bundle of competencies of
which become resources in context for value creation and
it can have a form, and then change its form dynamically
to suit a context. This makes the understanding of an ‘ac-
tor’, competency and resource appear very abstract and
hard to grasp on one hand, but on the other, ideal to sup-
port a revolution of the views on objects (particular digi-
tal/software objects) and even for the business in the
course of the digital transformation.
An application case: databoxes and micro-servers
Considering the almost endless possibilities for further so-
cio-economic development through the digital transfor-
mation, one of the most important tasks for researchers is
to provide transparency about the different paths on
which these possibilities can be realised and their implica-
tions for the emergence of new institutional structures in
the coming years. This applies in particular to the under-
standing of data access and control for the design of fu-
ture value networks and their attractiveness for the partic-
ipants in the value generation processes (Ng et al. 2017).
At the moment, we can see that personal data are mainly
collected by organisations in the digital economy because
of their technological competency, often called organiza-
tion-controlled personal data (OPD), while the over-
whelming majority of individuals who generate the data
have no such competency to control over their further us-
age, and are in many cases not even aware of the fact that
their data matter and that they are collected. While this
might be necessary to drive the digital transformation
ahead in their early phases, a socially sustainable setting
for the digital economy will require a different design.
During the past years, different concepts of databoxes
have been developed to address this issue (Perera et al.
2017). We briefly describe the underlying idea on the ex-
ample of the Hub of All Things (HAT) (Ng et al. 2013).
The Hub of All Things (HAT) ecosystem3 is one that has
been created to explore how a wider distribution of data
3
http://hubofallthings.com
15
Matzner et al., Digital Transformation in Service Management
storage, control and rights by those who generate the data
can spur further economic development with newly
emerging businesses in the field of data processing and in-
tegration. The HAT is a piece of technology designed to
help individuals exchange and trade personal data across
the Internet through a personal ‘micro-server’ to claim,
control, use and exchange data much like organisations
are able to (HPRT 2016). HATs Micro-server data accounts
are fully owned by individuals and they have full control,
access and rights over the data within it. This gives the in-
dividual the freedom and the power to own and exchange
as much (or as little) of their own information as they
want with the companies and the websites that they like.
It also implies that the HAT owners participate in the
same market for data, originally supplied only by large or-
ganisations, with a new supply of personal data – person-
controlled personal data (PPD)4. With the potential to gen-
erate and collect rich sets of personal information, while
preserving personal privacy, the HAT has the potential to
disrupt the current Internet economy by creating an alter-
native supply to the market in parallel with organisation-
controlled personal data (OPD). In addition, a HAT Micro-
server is a powerful piece of technology able to generate
new data through machine learning algorithms and ana-
lytics, by transforming the data coming into the HAT, in
the private domain of the individual. As an alternative
supplier of data, PPD can therefore also supply insights
such as contexts, persona, interests, priorities and inten-
tions dynamically5. As a new ‘actor’ on the Internet, one
that is the digital data-driven avatar of the person, the
HAT can create value in multiple contexts by shifting and
changing the types of data that may be competent for dif-
ferent personalised contexts such as ads, new and prod-
ucts, fulfilling the real potential of the Internet for firms,
organisations, and individuals alike.
Conclusion
The HAT Micro-server raises issues about the nature of
the artefact. While it is only controlled by the person and
the data inside processed through code instructed by the
person, it behaves similarly to how the PC came about in
the 1970s and the smartphone in the 1990s. Originally just
a box with few applications, the HAT Micro-server, like
both PC and smartphones, will also slowly grow with
more private applications within it. However, within the
wider Internet, it is neither an organization nor a physical
person behind a mouse or a screen. It is a bundle of com-
petencies under the control of a person that potentially
unlocks much innovation on the Internet. The language to
describe that, which we argue is provided by service eco-
4
https://medium.com/hub-of-all-things/personal-data-as-
an-asset-class-2e713deedd10
5
https://medium.com/hub-of-all-things/me-myself-and-ai
-b6f92fbc6052
16 SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
systems work in S-D logic, is the language of the revolu-
tion.
Research directions: Living Labs and other spaces
for innovation and co-creation
By Julia M. Jonas, Veronica Martinez, Kathrin M. Möslein
and Andy Neely
With digital product-service systems and the need to
speed up innovation cycles, living labs have become a
platform for interactive co-creation and innovation which
allow for direct exchange with the public, customers, us-
ers and other stakeholders (Dell’Era and Landoni 2014;
Greve et al. 2016; Roth et al. 2014). These spaces for inter-
active value creation “create conditions to generate cus-
tomer-driven information” (Edvardsson et al. 2012, p. 424)
and innovation. Nyström et al. (2014, p. 483) put forward
that living labs invite users to collaborate, “to create, pro-
totype, validate, and test new technologies, services, prod-
ucts, and systems in real-life contexts”. To create more
knowledge about the co-creation in living labs, its effects
and its transferability to other settings and industries, we
propose directions for research integrating a stronger sys-
tem perspective and a broader range of digital, physical
and blended reality research methods.
First, on a micro level, the focus of research needs to shift
from highlighting the process of co-creation and its mere
facilitation (see e.g. Greve et al. 2016; Leminen et al. 2012;
Nyström et al. 2014) to questions such as “how can we de-
sign living lab spaces for specific requirements of digi-
tized organizations?”, “how can the co-creation process
and tools in living labs be designed to optimally derive
knowledge from co-creation in digital and physical
spaces, with the public?” and “how should we design co-
creation projects and the role of innovating firms so that
the gained outputs can be taken up in digital innovation
development?”. To create more and better interactions be-
tween involved organizational entities of an innovation
project and the living lab platform and/or co-creators, the
embeddedness of co-creation activities in the organiza-
tion, including the utilization of digital service, are prom-
ising paths for useful future research.
Research has already highlighted that living labs are em-
bedded in and highly dependent on the network actors
supporting the co-creation process with equipment,
knowledge and other resources (Leminen et al. 2012). The
multi-dimensional nature of relationships and sub-service
systems within the ecosystem of a living lab have not been
fully acknowledged, as in other fields of open innovation
(see e.g. Bogers et al. 2017). The integration of firm actors
and their organizational service system may impact their
established practices and arrangements and their roles or
 Matzner et al., Digital Transformation in Service Management
role perceptions. This may be taken into account for future
research as well as the aspect that the multiple interfaces
of actors organizing for co-creation in living labs and the
inter-relatedness of stakeholders of the living lab are af-
fected by the practices and activities in living labs. The
service system view on co-creation with multiple stake-
holders in a space for innovation shows strong potential
for insights in the micro-processes of co-creation and orga-
nizing for sustainable innovation.
When it comes to co-creation in virtual, physical or AR/
VR spaces, more in-depth knowledge is needed from lon-
gitudinal studies: The value co-creation, and so the co-cre-
ation of innovation, can be seen as “a longitudinal, dynam-
ic, interactive set of experiences and activities performed
by the provider and the customer, within a context, using
tools and practices that are partly overt and deliberate, and
partly based on routine and unconscious behavior” (Payne
et al. 2007, p. 85). In the context of living labs, the repeated
activities and routinization of co-creating behavior, stable
or changing tool-sets as well as the context and changes
should be taken into account, when analyzing co-creation
processes and outcomes (Kaulio 2010). As we still lack in-
sight into the long-term effects of co-creation for innova-
tion on e.g. learning and motivation of co-creating actors
(Frow et al. 2015; Hoyer et al. 2010), employee behavior,
and the network relationships resulting, these issues are
promising pathways for future research.
In the context of co-creation for innovation, with subjec-
tive and inter-subjective behavior and plural perceived re-
alities, the notion of time and space as well as the physical
and digitally enabled environments – also referred to as
servicescapes (Bitner 1992; Nilsson and Ballantyne 2014)
or context (Edvardsson et al. 2012) – have a strong impact
on the experience of co-creating as well as in context of the
actual purchasing process (Helkkula 2011; Kotler 1973; Pa-
yne et al. 2007; Prahalad and Ramaswamy 2004). Yet, the
atmosphere, surrounding and inter-personal behavior, in-
cluding the embeddedness of co-creation in (several po-
tentially overlapping) innovation ecosystems – in living
labs and in general – are still underrepresented in current
research. More research on the suitability of different
types of spaces for the different types of co-creation in dig-
ital and physical spaces, or blended experiences in spaces
for innovation can improve the practical and theoretical
understanding of co-creation for innovation.
Moreover, living labs offer the opportunity for the appli-
cation of a variety of research methods, including obser-
vations and mixed methods (Edvardsson et al. 2012; Rus-
so-Spena and Mele 2012; Pera et al. 2016). To shed light on
the behavioral and experiential aspects of co-creation for
innovation as well as the inter-relatedness of actors in this
context, in situ research, experimental and phenomeno-
logical research are needed. Such approaches, combined
SMR · Journal of Service Management Research · Issue 02 · 02. Quarter 2018
with the possibilities of digital technologies such as e.g.
emotion recognition, sociometric badges (Dietzel et al.
2018) or voice analyses, to research interactive co-creation
in living labs will allow to capture behavior, meaning of
resources and actions in context as well as real-time per-
ceptions, beyond what can be expressed in words, clicks
or imagined situations (Echeverri 2017).
Further, more research is needed on how co-creation for
innovation, and especially the living lab approach, works
in different spacial arrangements (e.g. virtual realities,
physical spaces in different locactions), in different cul-
tures, including economic and society related aspects; liv-
ing labs are not only embedded in innovation – firm and
co-creator – ecosystems, but even connected and inter-
twined with the local public, politics and education sys-
tems, (Dell’Era and Landoni 2014; Guzman et al. 2013; Ny-
ström et al. 2014; Siltaloppi et al. 2016) as evidenced e.g. in
smart city and citizen participation projects (Hilgers and
Ihl 2010; Komninos et al. 2013; Letaifa 2015). Future re-
search may take these aspects into account and create
more in-depth insight on co-creation of innovations in lo-
cally embedded open and living laboratories.
Living labs are a rapidly growing phenomenon (Dell’Era
and Landoni 2014): Temporal or event-based, company-,
community-, public actor or intermediary driven (Lemi-
nen et al. 2012; Roth et al. 2014), in physical or virtual
spaces, living labs are offering the opportunity to test, de-
velop and prototype products, services and digital prod-
uct-service systems. To apply interactive tools for co-crea-
tion in order to understand user needs, to get access to
wishes and ideas about their offerings, innovating firms
may not need to go to a designated living lab space, but
could potentially bring the living lab approach and the
connected interactive and digitally enabled methods to
their natural environment; this may be suitable especially
for large and complex gears, for difficult to transport and
niche user solutions. This is why we put forward the ques-
tion how living lab mechanisms and methods can be
transferred to more traditional settings (like e.g. trade
fairs and retail), for more interactive and conversational
discourses about products and services in place of multi-
layered interconnected interactions in the digital age.
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Keywords
Digital transformation, service system, digitaliza-
tion, digital service, co-creation

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